UNITED STATES

**SECURITIES AND EXCHANGE COMMISSION**

Washington, D. C. 20549

**FORM 10-Q**

(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE

SECURITIES EXCHANGE ACT OF 1934

**For the Quarterly Period Ended: March 31, 2008**

( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____________ to ____________

*Commission File Number: 000-30771*

**INTERACTIVE MOTORSPORTS AND**

**ENTERTAINMENT CORP.**

(Exact name of registrant as specified in charter)

**Indiana 35-2205637**

(State or other jurisdiction of incorporation or organization) (I.R.S. Employer I.D. No.)         

**5624 West 73rd Street, Indianapolis, Indiana 46278**

(Address of principal executive offices)

**(317) 295-3500**

(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing        requirements for the past 90 days.                    Yes x    No |_|

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).

Large accelerated filer   |_|    Accelerated filer  |_|    Non-accelerated filer   |_|     Smaller reporting company  x            (do not check if smaller        reporting company)                 Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).                     Yes |_|No x    

As of June 13, 2008, there were 105,503,910 (par value $0.0001) common shares issued and outstanding.                  

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**INDEX TO QUARTERLY REPORT ON FORM 10-Q**

pAGE

sECTION

**PART I**         

| ITEM 1. | Condensed Financial Statements and Notes to Financial Statements                            |   |
|---------|---------------------------------------------------------------------------------------------|--------|
|    | Consolidated Balance Sheets at                                                              |   |
|    | March 31, 2008 and December 31, 2007                                                        | 3      |
|    | Consolidated Statements of Operations for the Three Months Ended                            |   |
|    | March 31, 2008 and December 31, 2007                                                        | 5      |
|    | Consolidated Statement of Changes in Shareholders’ Deficit for the Period Ended       |   |
|    | March 31, 2008                                                                              | 6      |
|    | Consolidated Statements of Cash Flows for the Three Months Ended                            |   |
|    | March 31, 2008 and December 31, 2007                                                        | 7      |
|    | Notes to Consolidated Financial Statements                                                  | 9      |
| ITEM 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 14     |
| ITEM 3. | Quantitative and Qualitative Disclosures About Market Risk                                  | 20     |
| ITEM 4. | Internal Controls and Procedures                                                            | 20     |

**PART II**         

| ITEM 1.  | Legal Proceedings                                           | 22 |
|----------|-------------------------------------------------------------|----|
| ITEM 1A. | Risk Factors                                                | 23 |
| ITEM 2.  | Unregistered Sales of Equity Securities and Use of Proceeds | 24 |
| ITEM 3.  | Defaults Under Senior Securities                            | 24 |
| ITEM 4.  | Submission of Matters to a Vote of Security Holders         | 24 |
| ITEM 5.  | Other Information                                           | 24 |
| ITEM 6.  | Exhibits                                                    | 25 |

| SIGNATURES    | 26 |
|---------------|----|
|          |
| EXHIBIT INDEX | 27 |

             

2

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**PART I**

**Item 1. Condensed Financial Statements**         

**INTERACTIVE MOTORSPORTS AND ENTERTAINMENT CORP. AND SUBSIDIARIES**

Consolidated Balance Sheets

ASSETS

|                                                                                                              |   | *March 31, 2008*          |   |   | *December 31, 2007*     |
|-------------------------------------------------------------------------------------------------------------------|--------|---------------------------|--------|--------|-------------------------|
|                                                                                                              |   | ***(****Unaudited****)*** |   |   | ***(****Audited****)*** |
| Current Assets                                                                                                    |   |                      |   |   |                    |
| Cash                                                                                                              | $      | 74,476                    |   | $      | 133,731                 |
| Accounts Receivable, Net of allowance for bad debt of $78,776 in March 31, 2008 and $238,781 in December 31, 2007 |   | 184,926                   |   |   | 203,095                 |
| Inventory                                                                                                         |   | 310,443                   |   |   | 319,062                 |
| Prepaid Expenses                                                                                                  |   | 18,561                    |   |   | 16,314                  |
| Total Current Assets                                                                                              |   | 588,406                   |   |   | 672,202                 |
|                                                                                                              |   |                      |   |   |                    |
| Property and Equipment                                                                                            |   |                      |   |   |                    |
| Total Property and Equipment, Net                                                                                 |   | 802,157                   |   |   | 858,306                 |
|                                                                                                              |   |                      |   |   |                    |
| Other Assets                                                                                                      |   |                      |   |   |                    |
| Deposits                                                                                                          |   | 4,442                     |   |   | 4,442                   |
| Total Other Assets                                                                                                |   | 4,442                     |   |   | 4,442                   |
|                                                                                                              |   |                      |   |   |                    |
| Total Assets                                                                                                      | $      | 1,395,005                 |   | $      | 1,534,950               |

The accompanying notes are an integral part of these consolidated financial statements.             

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**INTERACTIVE MOTORSPORTS AND ENTERTAINMENT CORP. AND SUBSIDIARIES**

Consolidated Balance Sheets (Continued)

LIABILTIES AND SHAREHOLDERS’ EQUITY (DEFICIT)

|                                                           |   | *March 31, 2008*          |   |   | *December 31, 2007*     |
|----------------------------------------------------------------|--------|---------------------------|--------|--------|-------------------------|
|                                                           |   | ***(****Unaudited****)*** |   |   | ***(****Audited****)*** |
| *Current Liabilities*                                          |   |                      |   |   |                    |
| Accounts Payable                                               | $      | 945,146                   |   | $      | 871,649                 |
| Accrued Payroll Expense                                        |   | 12,227                    |   |   | 73,467                  |
| Accrued Sales Tax Payable                                      |   | 10,819                    |   |   | 41,514                  |
| Gift Cert. & Customer Deposits                             |   | 31,702                    |   |   | 29,595                  |
| Deposits on Simulator Sales                                    |   | 1,066,956                 |   |   | 1,011,158               |
| Accrued Liabilities                                            |   | 391,461                   |   |   | 386,571                 |
| Notes Payable - Related parties                                |   | 50,000                    |   |   | 50,000                  |
| Notes payable                                                  |   | 2,299,888                 |   |   | 2,064,672               |
| Total Current Liabilities                                      |   | 4,808,199                 |   |   | 4,528,626               |
|                                                           |   |                      |   |   |                    |
| *Long-term Liabilities*                                        |   |                      |   |   |                    |
| Notes payable                                                  |   | 1,339,579                 |   |   | 1,574,456               |
|                                                           |   |                      |   |   |                    |
| Total Liabilities                                              |   | 6,147,778                 |   |   | 6,103,082               |
|                                                           |   |                      |   |   |                    |
| *Shareholders’ Equity (Deficit)*                         |   |                      |   |   |                    |
| Common Stock                                                   |   | 10,120                    |   |   | 10,120                  |
| Additional Paid in Capital                                     |   | 5,582,011                 |   |   | 5,582,011               |
| Retained Deficit                                               |   | (10,344,904)              |   |   | (10,160,262)            |
| Total Shareholders’ Equity (Deficit)                     |   | (4,752,773)               |   |   | (4,568,131)             |
|                                                           |   |                      |   |   |                    |
| *Total Liabilities & Shareholders’ Equity (Deficit)* | $      | 1,395,005                 |   | $      | 1,534,950               |

The accompanying notes are an integral part of these consolidated financial statements.             

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**INTERACTIVE MOTORSPORTS AND ENTERTAINMENT CORP. AND SUBSIDIARIES**

Consolidated Statements of Operations            (Unaudited)

|                                                  |   |   | *For the Three Months Ending* |
|-------------------------------------------------------|--------|--------|-------------------------------|
|                                                  |   |   | *March 31*                    |
|                                                  |   |   | *2008*                        |   |   | *2007* |
|                                                  |   |   |                          |   |   |   |
| *Revenues*                                            |   |   |                          |   |   |   |
| Company Store Sales                                   |   | $      | 286,320                       |   | $ | 457,843 |
| Revenue Share Sales                                   |   |   | 136,265                       |   |   | 98,845 |
| Simulator Leases                                      |   |   | -                             |   |   | 6,333 |
| Sales of Simulator Systems                            |   |   | 346,608                       |   |   | 786,608 |
| Special Event Sales                                   |   |   | 60,799                        |   |   | 71,527 |
| Total Revenues                                        |   |   | 829,992                       |   |   | 1,421,156 |
|                                                  |   |   |                          |   |   |   |
| *Cost of Sales*                                       |   |   |                          |   |   |   |
| COGS - Merchandise                                    |   |   | 161                           |   |   | 10,817 |
| Group Sales Expenses                                  |   |   | -                             |   |   | 787 |
| COGS - Sale of Simulators                             |   |   | 6,992                         |   |   | 378,000 |
| COGS – Special Events                           |   |   | 30,059                        |   |   | 18,829 |
| Inventory Adjustments                                 |   |   | -                             |   |   | 528 |
| Total Cost of Sales                                   |   |   | 37,212                        |   |   | 408,961 |
|                                                  |   |   |                          |   |   |   |
| *Gross Profit*                                        |   |   | 792,780                       |   |   | 1,012,195 |
|                                                  |   |   |                          |   |   |   |
| *General & Admin Expenses*                        |   |   |                          |   |   |   |
| Payroll Related Expenses                              |   |   | 319,924                       |   |   | 361,338 |
| Occupancy Expenses                                    |   |   | 185,200                       |   |   | 277,294 |
| Other Operating Expenses                              |   |   | 223,919                       |   |   | 239,947 |
| Depreciation                                          |   |   | 88,370                        |   |   | 73,880 |
| Total Operating Expenses                              |   |   | 817,413                       |   |   | 952,459 |
|                                                  |   |   |                          |   |   |   |
| *Operating Profit (Loss)*                             |   |   | (24,633)                      |   |   | 59,736 |
|                                                  |   |   |                          |   |   |   |
| Interest Expense                                      |   |   | (160,009)                     |   |   | (148,650) |
|                                                  |   |   |                          |   |   |   |
| *Net Loss before Income Tax Expense*                  |   |   | (184,642)                     |   |   | (88,914) |
|                                                  |   |   |                          |   |   |   |
| Income Tax Expense                                    |   |   | -                             |   |   | - |
|                                                  |   |   |                          |   |   |   |
| *Net Loss*                                            |   | $      | (184,642)                     |   | $ | (88,914) |
|                                                  |   |   |                          |   |   |   |
| Net Profit (Loss) per share – basic and diluted |   | $      | (0.00)                        |   | $ | (0.00) |
|                                                  |   |   |                          |   |   |   |
| Weighted Average Shares Outstanding                   |   |   | 101,199,146                   |   |   | 96,397,506 |
| Diluted Common Shares Outstanding                     |   |   | 113,556,646                   |   |   | 107,289,006 |

The accompanying notes are an integral part of these consolidated financial statements.             

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**INTERACTIVE MOTORSPORTS AND ENTERTAINMENT CORP. AND SUBSIDIARIES**

Statement of Shareholders’ Deficit            (Unaudited)

|                                                                                                 |   |   |         |   |   | Additional                    Paid-In                    Capital |   |   | Retained                    Deficit |   |   | Total                    Shareholders’                    Equity (Deficit) |
|------------------------------------------------------------------------------------------------------|--------|--------|--------------|--------|--------|------------------------------------------------------------------|--------|--------|-------------------------------------|--------|--------|----------------------------------------------------------------------------------|
|                                                                                                 |   |   | Common Stock |   |   |                                                             |   |   |                                |   |
|                                                                                                 |   |   | Shares       |   |   | Amount                                                           |   |   |                                |   |   |                                                                             |   |   |
| Balance at                    December 31, 2007                                                      |   |   | 101,199,146  |   | $      | 10,120                                                           |   | $      | 5,582,011                           |   | $      | (10,160,262)                                                                     |   | $ | (4,568,131 |
|                                                                                                 |   |   |         |   |   |                                                             |   |   |                                |   |   |                                                                             |   |   |
| Warrant issued for                    2008 Notes Payable                    (unaudited)              |   |   | -            |   |   | -                                                                |   |   | -                                   |   |   | -                                                                                |   |   | - |
|                                                                                                 |   |   |         |   |   |                                                             |   |   |                                |   |   |                                                                             |   |   |   |
| Common stock issued for                    payment of Loan Interest                    (unaudited)   |   |   | -            |   |   | -                                                                |   |   | -                                   |   |   | -                                                                                |   |   | - |
|                                                                                                 |   |   |         |   |   |                                                             |   |   |                                |   |   |                                                                             |   |   |   |
| Net loss for the three months                    ended March 31, 2008                    (unaudited) |   |   | -            |   |   | -                                                                |   |   | -                                   |   |   | (184,642)                                                                        |   |   | (184,642 |
|                                                                                                 |   |   |         |   |   |                                                             |   |   |                                |   |   |                                                                             |   |   |   |
| Balance at                    March 31, 2008                    (unaudited)                          |   |   | 101,199,146  |   | $      | 10,120                                                           |   | $      | 5,582,011                           |   | $      | (10,344,904)                                                                     |   | $ | (4,752,773) |

The accompanying notes are an integral part of these consolidated financial statements.             

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**INTERACTIVE MOTORSPORTS AND ENTERTAINMENT CORP. AND SUBSIDIARIES**

Consolidated Statements of Cash Flows            (Unaudited)

|                                                           |   |   | *For the Three Months Ended                    March 31* |
|----------------------------------------------------------------|--------|--------|----------------------------------------------------------|
|                                                           |   |   |                                                     |
|                                                           |   |   | *2008*                                                   |   |   | *2007* |
| CASH FLOWS FROM OPERATING ACTIVITIES                           |   |   |                                                     |   |   |   |
|                                                           |   |   |                                                     |   |   |   |
| Net Loss                                                       |   | $      | (184,642)                                                |   | $ | (88,914) |
| Adjustments to reconcile net loss to net cash                  |   |   |                                                     |   |   |   |
| used by operating activities:                                  |   |   |                                                     |   |   |   |
| Depreciation and amortization                                  |   |   | 88,370                                                   |   |   | 73.880 |
| Amortization of notes payable discount                         |   |   | 8,560                                                    |   |   | 7,018 |
| Amortization of Dolphin Financing Agreement                    |   |   | (129,967)                                                |   |   | (111,968) |
| Common stock issued for interest                               |   |   | -                                                        |   |   | - |
| Net changes in operating assets and liabilities:               |   |   |                                                     |   |   |   |
| (Increase) decrease in trade accounts and other receivable     |   |   | 18,170                                                   |   |   | (46,031) |
| (Increase) decrease in inventory                               |   |   | 8,618                                                    |   |   | (19,257) |
| (Increase) decrease in prepaid expenses and other assets       |   |   | (2,247)                                                  |   |   | 4,108 |
| (Increase) decrease in deposits                                |   |   | -                                                        |   |   | (33,045) |
| Increase (decrease) in accounts payable                        |   |   | 73,497                                                   |   |   | 97,680 |
| Increase (decrease) in accrued payroll and payroll taxes       |   |   | (61,240)                                                 |   |   | (54,565) |
| Increase (decrease) in sales tax payable                       |   |   | (30,695)                                                 |   |   | 10,133 |
| Increase (decrease) in gift certificates and customer deposits |   |   | 2,107                                                    |   |   | 5,547 |
| Increase (decrease) in accrued expenses                        |   |   | 4,892                                                    |   |   | 71,292 |
| Increase (decrease) in deposits on simulator sales             |   |   | 55,797                                                   |   |   | 12,168 |
|                                                           |   |   |                                                     |   |   |   |
| Net Cash Used by Operating Activities                          |   |   | (148,780)                                                |   |   | (71,954) |
|                                                           |   |   |                                                     |   |   |   |
| CASH FLOWS FROM INVESTING ACTIVITIES                           |   |   |                                                     |   |   |   |
|                                                           |   |   |                                                     |   |   |   |
| Purchase of property and equipment                             |   |   | (34,080)                                                 |   |   | - |
| Sale of property and equipment                                 |   |   | 1,859                                                    |   |   | 7,458 |
|                                                           |   |   |                                                     |   |   |   |
| Net Cash Provided (Used) by Investing Activities               |   |   | (32,221)                                                 |   |   | 7,458 |
|                                                           |   |   |                                                     |   |   |   |
| CASH FLOWS FROM FINANCING ACTIVITIES                           |   |   |                                                     |   |   |   |
|                                                           |   |   |                                                     |   |   |   |
| Proceeds from issuance of notes payable                        |   |   | 200,000                                                  |   |   | - |
| Payments of notes payable                                      |   |   | (78,254)                                                 |   |   | (47,205) |
|                                                           |   |   |                                                     |   |   |   |
| Net Cash Provided (Used) by Financing Activities               |   |   | 121,746                                                  |   |   | (47,205) |
|                                                           |   |   |                                                     |   |   |   |
| DECREASE IN CASH                                               |   |   | (59,255)                                                 |   |   | (111,701) |
|                                                           |   |   |                                                     |   |   |   |
| CASH, BEGINNING OF PERIOD                                      |   |   | 133,731                                                  |   |   | 216,323 |
|                                                           |   |   |                                                     |   |   |   |
| CASH, END OF PERIOD                                            |   | $      | 74,476                                                   |   | $ | 104,622 |

The accompanying notes are an integral part of these consolidated financial statements.             

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**INTERACTIVE MOTORSPORTS AND ENTERTAINMENT CORP. AND SUBSIDIARIES**

Consolidated Statements of Cash Flows (Continued)            (Unaudited)

|                                |   |   | *For the Three Months Ended                    March 31* |
|-------------------------------------|--------|--------|----------------------------------------------------------|
|                                |   |   |                                                     |
|                                |   |   | *2008*                                                   |   |   | *2007* |
|                                |   |   |                                                     |   |   |   |
| SUPPLEMENTAL CASH FLOW DISCLOSURES: |   |   |                                                     |   |   |   |
|                                |   |   |                                                     |   |   |   |
| Cash paid for interest              |   | $      | 84,136                                                   |   | $ | 57,942 |
| Cash paid for income taxes          |   | $      | -                                                        |   | $ | - |
|                                |   |   |                                                     |   |   |   |

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NOTE 1 – BASIS OF PRESENTATION

The Company’s financial statements are prepared using accounting principles generally accepted in the United States of America applicable to a going concern which contemplates the realization of assets and liquidation of liabilities in the normal course of business. The Company has historically incurred losses, which raises substantial doubt about the Company’s        ability to continue as a going concern. The accompanying financial statements do not include adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result from the outcome of this uncertainty.         The accompanying unaudited condensed consolidated balance sheets of Interactive Motorsports and Entertainment Corp. (the “Company”) at March 31, 2008 and December 31, 2007 and the unaudited consolidated statements of operations and statements of cash flows for the three months ended March 31, 2008 and March 31, 2007 have been prepared by the Company’s management and do not include all the information and notes to the financial statements        necessary for a complete presentation of the financial position, results of operations, and cash flows in conformity with generally accepted accounting principles. In the opinion of management, all adjustments necessary for a fair presentation of the results of operations and financial position have been included and all such adjustments are of a normal recurring nature. Although management believes the disclosures are adequate to make the information presented not misleading, it is        suggested that these condensed consolidated financial statements be read in conjunction with the audited financial statements and the notes thereto included in the Company’s latest annual financial statements included in the Company’s annual report on Form 10-K. The results of operations for the three months ended March 31, 2008 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2008 or any future period.         

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

|  | a.      | Use of Estimates |
|--|----------------------------------|------------------|

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues        and expenses during the reporting period. Actual results could differ from those estimates.         

|  | b.      | Accounting for the Sale of Simulators |
|--|----------------------------------|---------------------------------------|

The Company records the sale of simulators using the percentage of completion method of accounting. The percentage of completion for any given sales contract is determined by the ratio of costs incurred to date to the total estimated cost for each site build. Costs incurred consist of purchased components, outside services, and outside contract labor cost.

NOTE 3 - DEBT AND CREDIT ARRANGEMENTS

On February 2, 2004 and June 6, 2004, Perfect Line, Inc. issued notes bearing an interest rate of 9.6% payable in the total amount of $750,000. Each note came with an option to purchase common shares of the Company equal to the amount of notes purchased divided by the fair market value of the Company’s stock on the date of issuance. The notes became due on February 2,        2005, and $260,000 of the notes was paid in full at that time. A note holder of an additional $344,000 of the notes elected to receive a cash payment of $16,000 and exercise options granted with the note purchase for full payment of the note per the terms of the 2004 Agreement. The note holder of the final $146,000 in notes has been repaid $58,500 as of April 17, 2007, and the balance was assigned to two unrelated third parties, one in the amount of $75,000 and the other in the amount        of $12,500. The term of the note was extended by 24 months, and the pre-payment terms were amended to reflect that there will be no pre-payment option, while all other terms remained the same, including the expiration of the option 30 days past the maturity date.

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**INTERACTIVE MOTORSPORTS AND ENTERTAINMENT CORP. AND SUBSIDIARIES**

Notes to the Consolidated Financial Statements                          

NOTE 3 - DEBT AND CREDIT ARRANGEMENTS (continued)

On December 31, 2004, March 31, 2005 and April 15, 2005, the Company entered into three Asset Purchase Agreements with Race Car Simulation Corp.(“RCSC”), a subsidiary of Dolphin Direct Equity Partners, LP (“Dolphin”), pursuant to which it sold forty-four (44) of its race car simulators that were located in existing revenue share locations, or had been installed in        new revenue share sites. The sale is accounted for as a borrowing in accordance with the guidance provided in paragraphs 21-22 of SFAS 13. While this transaction generated an aggregate purchase price of $2,856,600, it also depleted monthly revenue share payments to the Company generated by the simulators that were sold. In May of 2007, RCSC filed a complaint against National Tour, Inc. and its chief executive officer, Johnny Capels, personally. RCSC claimed that National Tour, backed by        a personal guarantee by Johnny Capels, owed the company at least $193,000 in lease payments plus interest and other costs under the lease agreements between the parties. The lease agreements involve twelve (12) of the Company’s simulators which were part of the 44 considered a “borrowing” under GAAP guidelines, and may be a contingent liability for the Company under the terms of its guarantee to RCSC under the asset purchase agreement. The Company has an obligation        under a Performance Guarantee clause of their agreement with RCSC to guarantee certain contracted revenue share or lease payments through 2007, and also has the obligation to find new revenue share or lease partners for the RCSC simulators under a ‘Most Favored Nations” clause in the agreement with RCSC In November of 2007, the Company removed an additional 8 of RCSC’s SMS simulators from the Syracuse, NY site to Incredible Pizza sites in Oklahoma City, OK and Dallas,        TX (four in each site). See Part 2, Item 1 Legal Proceedings for details on the complaint filed by RCSC.

Pursuant to the Note and Option Purchase Agreement and Security Agreement dated November 2005 (“2005 Agreement”), the Company issued notes bearing an interest rate of 12% payable in the total amount of $122,500. These notes were issued between October 13, 2005 and November 4, 2005. Each note came with an option to purchase common shares of the        Company equal to the amount of notes purchased divided by the exercise price of the option. The notes were due on October 1, 2007, and the Company has asked the note holders to extend the note under the same terms until additional funding is in place. There is no assurance that one or more of the note holders will not demand payment.         

The value of the options was amortized to interest expense over their life expired on November 1, 2007.

On July 14, 2006, the Company entered into Note and Warrant Purchase and Security Agreements with ten (10) investors in a private placement which is exempt from the registration provisions of the Securities Act of 1933, as amended, pursuant to Reg. D and Rule 506 adopted thereunder. The Notes, totaling $950,000,were issued by Perfect Line, will be fully paid down July 17,        2010, and bear interest at a rate of 16% per annum (increased from 15% on September 21, 2007) for the total interest amount over the four year period of $326,194. The principle balance of the notes on March 31, 2008, was $616,719. Each note came with an option to purchase common shares of the Company equal to two and one half times the amount of notes purchased divided by the exercise price of the option. The principle and interest on the Notes are payable weekly over a four year term        and are secured by a first security interest in 20 of the simulators owned by Perfect Line.                 The value of the options will be amortized to interest expense over their life which expires on July 13, 2010. Amortization of option discount for the options related to the 2006 Agreement of $3,795 was included in interest expense for the quarter ended March 31, 2008.

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**INTERACTIVE MOTORSPORTS AND ENTERTAINMENT CORP. AND SUBSIDIARIES**

Notes to the Consolidated Financial Statements                          

NOTE 3 - DEBT AND CREDIT ARRANGEMENTS (continued)

                  On April 12, 2007, the Company entered into a Mutual Release and Settlement Agreement with Mall of Georgia, LLC. The terms of the agreement released the Company from any future lease obligations at the site and set the financial settlement was payable in        six (6) installments between May, 2007 and June, 2008. On March 31, 2008, the balance due was $177,346, and $20,000 payments due from December to June had been missed. $95,580 is directly attributable to Perfect Line with the remainder of the note attributable to unpaid rent due from lease assignee, Checker Flag Lightning, LLC..The Company has filed a Motion for Partial Summary Judgment against        Checker Flag Lightning, LLC in the amount of $357,352. See Part I, Item 3, Legal Proceedings for more details.

On September 25, 2007 and October 4, 2007, the Company entered into Note and Warrant Purchase and Security Agreements with ten (10) investor in a private placement which is exempt from the registration provisions of the Securities Act of 1933, as amended, pursuant to Reg. D and Rule 506 adopted thereunder. The Notes, totaling $500,000, were issued by Perfect Line, will be        fully paid down September 27, 2011 and bear interest at a rate of 16% per annum for the total interest amount over the four (4) year period of $176,443. The principle balance of the notes on March 31, 2008, was $451,217. Each note came with an option to purchase common shares of the Company equal to two and one half times the amount of notes purchased divided by the exercise price of the option. The principle and interest on the Notes are payable weekly over a four year term and are        secured by a first security interest in 8 of the simulators owned by Perfect Line.

The value of the options will be amortized to interest expense over their life which expires on September 27, 2012. Amortization of option discount for the options related to the 2007 Agreement of $441 was included in interest expense for the quarter ended March 31, 2008.         

                 On October 31, 2007, Perfect Line and MOAC Mall Holdings, LLC, the Mall of America landlord, agreed to a stipulation agreement whereby Perfect Line signed a promissory note totaling $310,553 payable in seven (7) payments between December 15, 2007 and October 1,        2008. On March 31, 2008, the December, February, March and April payments totaling $160,978 had not been made.

On February 6, 2008, the Company entered into a Second Amended and Restated Secured Bridge Note with Ropart Asset Management due December 31, 2008 and increased the note amount from $600,000 to $800,000, and the collateral was increased by 2 SMS simulators.

11

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**INTERACTIVE MOTORSPORTS AND ENTERTAINMENT CORP. AND SUBSIDIARIES**

Notes to the Consolidated Financial Statements                          

NOTE 3 - DEBT AND CREDIT ARRANGEMENTS (continued)

Notes Payable consisted of the following:

|                                                                                                                                                                                         |   | For the Period Ended              |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------|
|                                                                                                                                                                                         |   | March 31,                    2008 |   | December 31, 2007 |
| Note payable to investor bearing interest at 12%, due at an undetermined date in 2007. Secured by certain simulators of the Company and a personal guaranty of the President of the Company. | $      | 800,000                           | $ | 600,000 |
|                                                                                                                                                                                         |   |                              |   |   |
| Note payable to individuals, bearing interest at 12%, due October 1, 2007. Secured by certain simulators of the Company.                                                                     |   | 122,500                           |   | 122,500 |
|                                                                                                                                                                                         |   |                              |   |   |
| Note payable to a landlord, payable in six (6) installments, due June 2008.                                                                                                                  |   | 177,346                           |   | 177,346 |
|                                                                                                                                                                                         |   |                              |   |   |
| Note payable to a landlord, payable in seven (7) installments, due October 2008.                                                                                                             |   | 310,554                           |   | 310,554 |
|                                                                                                                                                                                         |   |                              |   |   |
| Note payable to individuals, bearing interest at 9.6%, due April 17 2009. Secured by certain simulators of the Company.                                                                      |   | 87,500                            |   | 87,500 |
|                                                                                                                                                                                         |   |                              |   |   |
| Borrowing transaction with RCS bearing imputed interest at 15%, 5 year term.                                                                                                                 |   | 1,156,767                         |   | 1,286,728 |
|                                                                                                                                                                                         |   |                              |   |   |
| Note payable to individuals, bearing interest at 16%, due July 13, 2010. Secured by certain simulators of the Company.                                                                       |   | 616,719                           |   | 671,180 |
|                                                                                                                                                                                         |   |                              |   |   |
| Note payable to individuals, bearing interest at 16%, due September 13, 2011. Secured by certain simulators of the Company.                                                                  |   | 451,217                           |   | 475,010 |
|                                                                                                                                                                                         |   |                              |   |   |
| Less: unamortized discount & debt offering costs                                                                                                                                         |   | (83,132)                          |   | (91,690) |
| Total Notes Payable                                                                                                                                                                          |   | 3,639,467                         |   | 3,639,128 |
|                                                                                                                                                                                         |   |                              |   |   |
| Less: Current Portion                                                                                                                                                                        |   | (2,349,888)                       |   | (2,064,672) |
| Total Notes Payable – Long Term Portion                                                                                                                                                | $      | 1,339,579                         | $ | 1,574,456 |
|                                                                                                                                                                                         |   |                              |   |   |
| Future maturities of notes payable as of December 31,                                                                                                                                        |   |                              |   |   |
| 2008                                                                                                                                                                                         | $      | 2,065,011                         |   | 2,064,672 |
| 2009                                                                                                                                                                                         |   | 1,089,402                         |   | 1,089,402 |
| 2010                                                                                                                                                                                         |   | 383,526                           |   | 383,526 |
| 2011                                                                                                                                                                                         |   | 101,528                           |   | 101,528 |
| Total Notes Payable                                                                                                                                                                          | $      | 3,639,467                         |   | 3,639,128 |

12

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**INTERACTIVE MOTORSPORTS AND ENTERTAINMENT CORP. AND SUBSIDIARIES**

Notes to the Consolidated Financial Statements                          

NOTE 4 - SIMULATOR SALE AGREEMENTS

The Company completed the sale of three SMS simulators to Scheels All Sports in the first quarter of 2008. Installation is not expected until third quarter of 2008.         

NOTE 5 - SUBSEQUENT EVENTS         

On May 19, 2008, the Company entered into a Third Amended and Restated Secured Bridge Note with Ropart Asset Management due December 31, 2008 and increased the note amount from $800,000 to $950,000.

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**Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations**

The following discussion and analysis provides information that we believe is relevant to an assessment and understanding of the consolidated results of operations and financial condition of the Company. The terms "Company", "we", "our" or "us" are used in this discussion to refer to Interactive Motorsports and Entertainment Corp. along with        Interactive Motorsports and Entertainment Corp.’s wholly owned subsidiary, Perfect Line, Inc., on a consolidated basis, except where the context clearly indicates otherwise. The discussion and information that follows concerns the Registrant as it exists today, as of this filing, including the predecessor of the Company’s operations, Perfect Line, LLC.

**Information on Forward-Looking Statements**

This Form 10-Q and other statements issued or made from time to time by the Company or its representatives contain statements, which may constitute "forward-looking statements" within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934, as amended by the Private Securities Litigation Reform Act of 1995, 15 U.S.C.A Sections 77z-2        and 78u-5. Those statements include statements regarding the intent, belief, or current expectations of the Company and members of its management team as well as the assumptions on which such statements are based. All statements, trend analyses, and other information contained in this report relative to markets for the Company's products and/or trends in the Company's operations or financial results, as well as other statements which include words such as "anticipate," "could,"        "feel(s)," "believes," "plan," "estimate," "expect," "should," "intend," "will," and other similar expressions, constitute forward-looking statements and are subject to known and unknown risks, uncertainties and other factors that may cause actual results to be materially different from those contemplated by the forward-looking statements. Such factors include, among other things: (i) general economic conditions that may impact the disposable income and spending habits of consumers;        (ii) the availability of alternative entertainment for consumers; (iii) the ability of the company to obtain additional capital and/or debt financing; (iv) the ability of the company to control costs and execute its business plan.

The reader is cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and that actual results may differ materially from those contemplated by such forward-looking statements. Important factors currently known to management that could cause actual results to differ materially from those        in forward-looking statements are set forth herein. The Company undertakes no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time.         

**Recently Issued Accounting Standards**

None

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**History**

IMTS is headquartered in Indianapolis, Indiana. In June 2001, Perfect Line, LLC (d/b/a NASCAR Silicon Motor Speedway) was formed to purchase, for approximately $1.5 million, the assets of SEI, including intellectual property and the contents of 14 of the 15 NSMS racing centers, which included 170 simulators. SEI showed these assets on its books at        approximately $30 million. In August 2002, Perfect Line became a wholly owned subsidiary of IMTS, through an exchange of shares that resulted in Perfect Line shareholders owning approximately 82% of IMTS equity. Simultaneous with this event, approximately $2.6 million in private equity financing was made available to Perfect Line. Approximately one-half the funding was used to retire the Company’s bank note and the balance was used for working capital.                 In July of 2003, management began the process of revising the Company’s business model, changing the focus from the inherited Company owned and operated mall-based racing centers to revenue share, lease and purchased simulators for mall merchandise retailers, family entertainment centers, amusement parks, casinos, auto malls, etc., as well as for experiential mobile marketing programs such as the Nextel Experience and the DaimlerChrysler auto show exhibits.                 In late 2004, the Company raised funds through debt financing and began manufacturing new SMS simulators in 2005 to meet the demand. In late 2005 it introduced the new Reactor simulator, a more portable, mobile and affordable model for the market.         

Funding the operations through revenues from the business and through primarily debt financing, the Company has laid the groundwork for a focus on the experiential mobile marketing industry and the out-of-home, multi-site interactive gaming opportunity. A recent license with iRacing.com, owned by John Henry (principle owner of the Boston Red Sox), and David        Kaemmer (co-founder of Papyrus Racing Games), owners of the Papyrus NASCAR Racing 2003, will potentially allow the Company to complete its modeling of the multi-player/multi-site virtual league gaming, although there can be no assurance that the project will be successful.

**Overview**

Interactive Motorsports and Entertainment Corp. (“IMTS” or the “Company”), an Indiana corporation, is a world leader in race simulation. Operating through its wholly owned subsidiary, Perfect Line, Inc., the Company manufactures two versions of race car simulators and sells racing experiences to the public through revenue sharing and        marketing agreements for the ‘out-of-home-‘ interactive gaming market. The Company contracts with operators in malls, amusement parks, family entertainment centers, casinos, and with third parties for trade shows and mobile fan interactive experiences. Under team and track licenses from America’s fastest growing sport, NASCAR, simulator customers experience driving in a NASCAR racecar that simulates the motion, sights and sounds of an actual NASCAR event. The Company        owns and operates a racing center at the Mall of America in Minneapolis, MN, featuring 12 simulators as well as a selection of popular NASCAR merchandise. The Company is positioning itself to be a world leader in the ‘out-of-home’ multi-player/multi-site virtual league market, and the experiential mobile marketing industry.                 The Company currently has two versions of racecar simulators, the SMS and the Reactor. In marketing these two products it leverages its strategic relationships and proprietary assets, which include sophisticated racing simulation technology (including 2 patents, and license agreements with NASCAR race tracks and race teams), to offer a unique and affordable race simulation experience.                 The Company’s business strategy currently targets: 1) end customers in fixed site venues who are gamers and/or NASCAR enthusiasts, and 2) experiential marketing clients, including but not limited to NASCAR sponsors, who use the experience to draw attention to their product display and to collect potential customer data and drive them to a website. In addition, under a new multi-year proprietary software license agreement with iRacing.com, exclusive for the        “out-of-home” race simulation category, the anticipated multi-player/multi-site virtual league offering is expected to engage the hardcore customers to compete in leagues and competitions on a regularly scheduled basis, although there can be no assurances.                 Through strategic alliances the Company currently has access to over twenty retail locations nationally, as well as eight experiential mobile marketing units traveling around the country. IMTS plans significant growth in product placement to fully exploit the available fixed and mobile marketing venues both domestically and internationally, although there can be no assurances.                 Perfect Line’s race simulators, including those owned by Race Car Simulation Corp., are currently featured in the following locations:

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**Locations**

*Company Owned (12 Simulators):*         

| *Location*          | *Year* | *Market*        | *Sq. Ft.* | *Simulators* |
|---------------------|--------|-----------------|-----------|--------------|
| *1)*Mall of America | 2001   | Minneapolis, MN | 5,899     | 12 SMS       |

*Revenue Share (80 Simulators):*         

| *Location*                         | *Year* | *Market*                 | *Sq. Ft.* | *Simulators* |
|------------------------------------|--------|--------------------------|-----------|--------------|
| *1)*NASCAR SpeedPark               | 2003   | Sevierville, TN          | 1,500     | 6 SMS#       |
| *2)*NASCAR SpeedPark               | 2003   | St. Louis, MO            | 1,500     | 6 SMS#       |
| *3)*Bass Pro Outdoor               | 2004   | Harrisburg, PA           | 500       | 2 SMS        |
| *4)*Jordan Creek Town Center       | 2004   | Des Moines, IA           | 4,000     | 8 SMS        |
| *5)*NASCAR SpeedPark               | 2005   | Toronto, Canada          | 1,500     | 6 SMS#       |
| *6)*Bass Pro Outdoor               | 2005   | Clarksville, IN          | 750       | 3 SMS        |
| *7)*NASCAR SpeedPark               | 2006   | Myrtle Beach, SC         | 1,600     | 6 SMS#       |
| *8)*Bass Pro Outdoor               | 2006   | Springfield, MO          | 500       | 3 SMS        |
| *9)*Bass Pro Outdoor               | 2006   | San Antonio, TX          | 500       | 2 SMS        |
| *10)*Bass Pro Outdoor              | 2007   | Mesa, AZ                 | 500       | 2 SMS        |
| *11)*Bass Pro Outdoor              | 2007   | Rancho Cucamonga, CA     | 500       | 2 SMS        |
| *12)*Wing Warehouse Sports B&G | 2007   | Akron, OH                | 1200      | 4 SMS        |
| *13)*Incredible Pizza              | 2007   | Euless, TX (Dallas)      | 1200      | 4 SMS        |
| *14)*Incredible Pizza              | 2007   | War Acres, OK            | 1200      | 4 SMS        |
| *15)*Incredible Pizza              | 2007   | Pasadena, TX             | 1200      | 4 SMS        |
| *16)*Incredible Pizza              | 2007   | Lafayette, LA            | 500       | 2 SMS*       |
| *17)*Miramar Speed Circuit         | 2007   | San Diego, CA            | 500       | 1 SMS        |
| *18)*Rapid City                    | 2007   | Rapid City, SD           | 1200      | 2 SMS        |
| *19)*Bass Pro Outdoor              | 2008   | Denham Springs, LA       | 500       | 2 SMS        |
| *20)*MB2 Raceway                   | 2008   | Los Angeles, CA          | 500       | 2 SMS*       |
| *21)*Bass Pro Outdoor              | 2008   | Birmingham, AL           | 750       | 3 SMS*       |
| *22)*Bass Pro Outdoor              | 2008   | Calgary, Alberta, Canada | 500       | 2 SMS*       |
| *23)*Bass Pro Outdoor              | 2008   | Richmond, VA             | 500       | 2 SMS*       |
| *24)*Wheatfield Lanes              | 2008   | Wheatfield, IN           | 500       | 2 SMS        |

*Mobile Units (40 Simulators):*         

| *Buyer*                           | *Year* | *Market*            | *Simulators* |
|-----------------------------------|--------|---------------------|--------------|
| *1)*DaimlerChrysler               | 2005   | European Auto Shows | 2 SMS        |
| *2)*H&H Motorsports/IMTS      | 2006   | Mobile Experience   | 2 Reactors   |
| *3)*Florida Simulated Racing Net. | 2006   | Mobile Experience   | 4 Reactors   |
| *4)*Exhibit Enterprises (Dodge)   | 2006   | Mobile Experience   | 4 Reactors   |
| *5)*Exhibit Enterprises (Dodge)   | 2006   | Mobile Experience   | 4 Reactors   |
| *6)*DGI, Inc (Nextel)             | 2006   | Mobile Experience   | 6 Reactors   |
| *7)*DGI, Inc (Toyota)             | 2006   | Mobile Experience   | 4 Reactors   |
| *8)*DGI, Inc (Nextel, Toyota)     | 2007   | Mobile Experience   | 14 Reactors  |

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*Sales of Simulators (70 Simulators):*         

| *Buyer*                              | *Year* | *Market*                              | *Simulators* |
|--------------------------------------|--------|---------------------------------------|--------------|
| *1)*Gurnee Mills                     | 2004   | Chicago, IL                           | 6 SMS!!      |
| *2)*Concord Mills                    | 2004   | Charlotte, NC                         | 12 SMS!!     |
| *3)*Opry Mills                       | 2004   | Nashville, TN                         | 10 SMS!!     |
| *4)*I-Vision Tech.                   | 2004   | Abu Dhabi, UAE                        | 2 SMS        |
| *5)*I-Vision Tech.                   | 2005   | Abu Dhabi, UAE                        | 4 SMS        |
| *6)*Ft. Gordon                       | 2005   | Ft. Gordon, GA                        | 2 SMS        |
| *7)*Fun City                         | 2005   | Burlington, IA                        | 1 SMS        |
| *8)*DaimlerChrysler                  | 2005   | US Auto Shows                         | 2 SMS        |
| *9)*Gate A Sports                    | 2006   | Cleveland, OH                         | 5 SMS        |
| *10)*Skycoaster of Florida           | 2006   | Kissimmee, FL                         | 6 SMS        |
| *11)*Vacationland F.E.               | 2006   | Brainerd, MN                          | 4 SMS        |
| *12)*NASCAR SpeedPark                | 2006   | Concord, NC                           | 3 Reactors   |
| *13)*George P. Johnson & Company | 2007   | Auburn Hills, MI (Shanghi experience) | 2 Reactors   |
| *14)*Prime Time FEC                  | 2007   | Abilene, TX                           | 3 SMS        |
| *15)*Miramar Speed Circuit           | 2007   | San Diego, CA                         | 1 SMS        |
| *16)*Rapid City                      | 2007   | Rapid City, SD                        | 2 SMS        |
| *17)*Road Story                      | 2008   | Austin, TX                            | 2 SMS*       |
| *18)*Scheels                         | 2008   | Reno, NV                              | 3 SMS*       |

# Denotes assets sold to Race Car Simulation Corporation with no current revenue stream to Company        * Denotes that simulators are not yet installed        !!Denotes site that CFL has vacated and Company is in process of acquiring these simulators

The balance of the 192 SMS simulators built since inception are at the Company’s warehouses or Elan Motorsports Technologies where they were built. The Company has built a total of 44 Reactor simulators.

**Review of Consolidated Financial Position**

**Cash:**The Company had $74,476 in cash as of March 31, 2008, compared with $133,731 at December 31, 2007, a decrease of $59,255. This decrease in the company’s position of cash during the first three months of 2008 was due principally to payments to vendors and        general operating expenses. See further discussion under the “Liquidity and Capital Resources” section below.         

**Trade Accounts Receivable:**At the year ending December 31, 2007, the Company established a reserve of $78,776 for a portion of the debt owed the Company by Ultimate Racing Experience. The Company continues to pursue the collection of the debt owed the Company by Ultimate Racing        Experience.

**Inventory:**At March 31, 2008, inventory decreased by $8,619 from December 31, 2007 levels due primarily to the reclassification of simulator parts in non-depreciated fixed assets to simulator inventory held for sale. Simulators in inventory decreased by $3,867 from December 31, 2007,        levels to $306,698 at March 31, 2008. Merchandise inventory decreased by $4,752 from December 31, 2007, levels during the three month period ending March 31, 2008.

**Notes Payable:**On March 31, 2008, the Company had an aggregate balance of $3,689,467 for Notes Payable. The balance consisted of $50,000 in related party agreements, $800,000 on the Ropart Note Payable, $1,156,762 on the 2004 Race Car Simulator Corporation (“RCS”) borrowing, $122,500 on the 2005        Agreement, $616,719 on the 2006 Agreements, $451,217 in the 2007 Agreements and $492,269 on other agreements.         

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**Deposits on Simulator Sales:**During the three month period ending March 31, 2008, the Company recorded all or a portion of three simulator sales transactions. This activity resulted in the increase of deposits on simulator sales of $55,798 to $1,066,956 as compared to the balance at        December 31, 2007.         

**Other Liabilities:**Accounts payable, accrued payroll and payroll taxes, sales taxes payable, unearned revenue, and other accrued expenses fluctuate with the volume of business, timing of payments, and the day of the week on which the period ends.

**Review of Consolidated Results of Operations         **

***THREE MONTHS ENDED MARCH 31, 2008 COMPARED TO THREE MONTHS ENDED MARCH 31, 2007***

**Revenues:**Revenues are comprised primarily of Company store sales, revenue share sales, and simulator leases and sales.                 Revenues for the three months ended March 31, 2008, decreased by $591,164 or 41.6% to $829,992 from $1,421,156 for the comparable period in 2007. This was the result of decreased store sales (Universal CityWalk store closed in January of 2008) and simulator sales in the three month period ending March 31, 2008.         

**Cost of Sales:**Cost of sales as a percentage of total revenues was 4% and 29% for the three months ended March 31, 2008 and 2007, respectively. Cost of sales decreased $371,748 or 90.9% to $37,212 for the three months ended March 31, 2008, from $408,960 for the comparable period in 2007. The primary reason for the        decrease in cost of sales was due to the fact that most of the simulator sales in 2007 were Reactor simulators that were manufactured new for the sale, and three simulator sales in the period ending March 31, 2008 were refurbished SMS simulators that required much less cost to prepare for the installations..         

**Gross Profit:**Gross profit as a percentage of total revenue was 96% and 71% for the three months ended March 31, 2008 and 2007, respectively. Gross profit decreased $219,416 or 21.7% to $792,780 for the three months ended March 31, 2008, from $1,012,196 for the comparable period in 2007. The decrease in gross profit        margin was primarily associated with the decrease in sales in the first quarter of 2008.

**General and Administrative:**General and administrative expenses decreased $135,050 or 14.2% to $817,412 for the three months ended March 31, 2008, compared to $952,459 for the comparable period in 2007. The primary reason for the decrease was a $92,094 decrease in other operating expenses.         

**Operating Profit:**The Company's loss from operations during the three months ended March 31, 2008 was $24,632 compared to an operation profit during the three months ended March 31, 2007 of $59,737.         

**Interest Expense:**Interest expense was $160,009 and $148,650 for the three months ended March 31, 2008 and 2007, respectively.         

**Net Profit:**The Company’s net loss for the three months ended March 31, 2008, was $184,642 compared to a net loss of $88,914 for the same period in 2007.

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**Liquidity and Capital Resources**

The primary source of funds available to the Company are receipts from customers for simulator and merchandise sales in its flagship owned and operated racing center, percentage of gross revenues from simulator races and minimum guarantees from revenue share and lease sites, the sale of simulators, proceeds from equity offerings including the $2,610 million        received in August 2002, proceeds from debt offerings including the $700,000 in Secured Bridge Notes and warrants issued in March 2003, the $604,000 in net proceeds from Notes and options issued between February and June, 2004, the additional loan of a net $100,000 from one of the existing Bridge Loan note holders, $2.9 million borrowed in December 2004, $122,000 from the 2005 Note, net proceeds of $855,000 borrowed in September of 2006, net proceeds of $427,500 borrowed in September of        2007, loans from shareholders, credit extended by vendors, and possible future financings.         

The Company has a history of losses, and the report of our independent accountants issued in connection with the audit of our financial statements contained a qualification raising a doubt about our ability to continue as a going concern. The Company currently is relying on prospective debt financing arrangements, and on simulator sales revenue using its        existing simulator inventory to offset its operating costs and debt obligations over the next 12 months, or until enough revenue share simulators are in the market to provide sufficient to cover these costs. As such, there is risk that the financing will not be available, or available on terms acceptable to the Company, and there is risk that the timing of the simulator sales will not coincide with the need for cash to cover operating expenses and note payments. If no meaningful        financing is secured by the Company in the near term, it may jeopardize the Company’s ability to maintain agreements with creditors to hold off taking actions against the Company for payments due.

The Company is pursuing some form of debt or equity financing sufficient to complete its development of the multi-site league play, to install its current inventory of SMS simulators into the marketplace and to satisfy the Company’s current and future liabilities and/or contingent liabilities, but there is no assurance that such funding will be        available, or available on terms acceptable to the Company.

During the three months ending March 31, 2008, the operating activities of the Company used net cash of $148,780 compared to net cash used of $71,954 for the comparable period in 2007. The drivers for the increase in cash used from operations can be attributed to the increase in prepaid expense, the increase in accounts payable and the amortization of the        Dolphin financing agreement.

During the three months ending March 31, 2008, the Company used $32,221 of net cash in investing activities compared with $7,458 of net generated in investing activities during the comparable period in 2007. The increase in cash from investing activities is primarily related to the purchase of simulators.

During the three months ending March 31, 2008, the Company generated a net $121,746 of cash from financing activities compared with $47,204 of cash used during the comparable period in 2007. The increase from financing activities is primarily related to the issuance of $200,00 in notes less payment of $78,254 in notes payable.

Cash flow from all sources (operations, investing activities and financing activities) was insufficient to fund the company during the three months ending March 31, 2008, and resulted in a $59,255 reduction in the Company’s cash position. This compares with $111,701 in cash reduction for all sources for the period ending March 31, 2007.

The Company has funded its retained losses through the initial investment of $650,000 in May 2001, $400,000 of capital contributed in February 2002, approximately $2.610 million received in August 2002, loans from related parties including net proceeds of $687,500 received in March, 2003, and net proceeds received between February 2004 and June 2004 totaling        $604,000, $122,500 in loan proceeds from the sale of the 2005 Notes between October and November, net proceeds of $845,000 in loan proceeds from the sale of the 2006 Notes in July, net proceeds of $855,000 borrowed in September of 2006, net proceeds of $450,000 borrowed in September and October of 2007, net proceeds of $200,000 borrowed in February of 2008, $1.237 million received in the form of deposits for the placement of race car simulators in revenue share locations, or for the        future purchase by third parties of race car simulators, and credit extended by vendors.

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As of March 31, 2008, the Company had cash totaling $74,476 compared to $133,731 at December 31, 2007. Current assets totaled $588,406 at March 31, 2008 compared to $672,202 on December 31, 2007. Current liabilities totaled $4,808,199 on March 31, 2008 compared with $4,528,626 on December 31, 2007. As such, these amounts represent an overall decrease in        working capital of $363,369 for the three months ending March 31, 2008.

**Item 3. Quantitative and Qualitative Disclosures About Market Risk.         **

None, not applicable.

**Item 4. Internal Controls and Procedures**

(a) Disclosure Controls and Procedures.         

Our management is responsible for establishing and maintaining adequate internal control over financial reporting.  Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in        accordance with GAAP.  Internal control over financial reporting includes policies and procedures that:

 

(1)           pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;

 

(2)           provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that our receipts and expenditures are being made only in accordance with authorization of our management and        directors; and

 

(3)           provide reasonable assurance regarding prevention or timely detection of unauthorized acquisitions, use or disposition of our assets that could have a material effect on our financial statements.

 

Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations.  Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human        failures.  Internal control over financial reporting also can be circumvented by collusion or improper management override.  Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting.  However, these inherent limitations are known features of the financial reporting process.  Therefore, it is possible to design safeguards to reduce, though not eliminate,        this risk.

Notwithstanding the existence any material weaknesses in internal controls, we believe that the consolidated financial statements fairly present, in all material respects, our consolidated balance sheet as of March 31, 2008 and our consolidated statements of operations, stockholders’ equity and cash flows for the        periods ending March 31, 2008 and 2007 in conformity with GAAP.         

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This annual report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting.  Our management’s report was not subject to attestation by our independent registered public accounting firm pursuant to temporary rules of the SEC        that permit us to provide only our management’s report in this annual report.

 

There has been no change in our internal control over financial reporting during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.                  

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**PART II**

**Item 1.     Legal Proceedings**

From time to time, the Company may be party to various legal actions and complaints arising in the ordinary course of business. The Company’s subsidiary Perfect Line, Inc. filed a complaint in the US District Court Southern District of Indiana on December 6, 2006, against Checker Flag Lightning, LLC and Mike Schuelke, seeking a Declaratory Judgment,        Injunctive Relief and Damages for failing to make the required payments (at least $559,119) under certain lease agreements between Checker Flag Lightning and Perfect Line. On April 18, 2007, the Company filed a Motion for Partial Summary Judgment in the amount of $357,372 against CFL on Counts II and VI of the Complaint (amounts that are owed since January 1, 2006). CFL filed its response to the Summary Judgment and did not dispute the amounts due to Perfect Line, however the case has        been stayed pending the outcome of the Bankruptcy Proceedings as described below.                 A Petition for Involuntary Bankruptcy was filed by Perfect Line against CFL on June 11, 2007. CFL filed a motion to dismiss the case based upon an insufficient number of creditors. The Michigan Court allowed more time for additional creditors to join the Petition, and the Involuntary Petition was granted and a trustee has been appointed, and is proceeding to administer the estate. Perfect Line has a first position security interest in 6 SMS simulators at the Gurnee Mills location        related to a $400,000 note with CFL, and has made an offer to the bankruptcy trustee for 22 SMS simulators that were in CFL sites. Another 8 SMS simulators that the Company owns are in the Jordan Creek site, and will be installed in future revenue producing sites.         

Checkered Flag Lightning was a lease assignee of Perfect Line for the Riverchase Galleria racing center in Birmingham, Alabama. Since CFL vacated this space in June of 2007, the landlord for this space informed Perfect Line in July of 2006 of CFL’s failure to pay an amount due at the end of 2006 of $204,380. Approximately half of this amount was a        previous Perfect Line obligation that was to be paid by CFL under the terms of the revenue share agreement between the parties, and the other half were more recent CFL defaults. In July of 2007, the landlord did release the 8 SMS simulators and related assets that were in this mall site to the Company, and they were removed and stored in the Company’s warehouse for future installations. The landlord’s attorney asked the Company for proposed settlement terms at the time the        simulators were removed, and Company proposed a payment plan for $109,000 of the amount in question. The Company did not receive a response to the proposal, and on March 11, 2008 (over 7 months after the proposal was submitted), the Company received a complaint from the landlord asking for CFL and Perfect Line to pay rents and other charges totaling $1,166,557. The Company is in final stages of a settlement agreement with the Plaintiff whereby the settlement amount will be $101,000, and        will be paid over 12 months.         

On December 31, 2004, March 31, 2005 and April 15, 2005, the Company entered into three Asset Purchase Agreements with Race Car Simulation Corp.(“RCSC”), a subsidiary of Dolphin Direct Equity Partners, LP (“Dolphin”), pursuant to which it sold forty-four (44) of its race car simulators that were located in existing revenue share locations, or had        been installed in new revenue share sites. The sale is accounted for as a borrowing in accordance with the guidance provided in paragraphs 21-22 of SFAS 13. While this transaction generated an aggregate purchase price of $2,856,600, it also depleted monthly revenue share payments to the Company generated by the simulators that were sold. In May of 2007, RCSC filed a complaint against National Tour, Inc. and its chief executive officer, Johnny Capels, personally. RCSC claimed that        National Tour, backed by a personal guarantee by Johnny Capels, owed the company at least $193,000 in lease payments plus interest and other costs under the lease agreements between the parties. The lease agreements involve twelve (12) of the Company’s simulators which were part of the 44 considered a “borrowing” under GAAP guidelines, and may be a contingent liability for the Company under the terms of its guarantee to RCSC under the asset purchase agreement. The        Company has an obligation under a Performance Guarantee clause of their agreement with RCSC to guarantee certain contracted revenue share or lease payments through 2007, and also has the obligation to find new revenue share or lease partners for the RCSC simulators under a ‘Most Favored Nations” clause in the agreement with RCSC In November of 2007, the Company removed an additional 8 of RCSC’s SMS simulators from the Syracuse, NY site to Incredible Pizza sites in        Oklahoma City, OK and Dallas, TX (four in each site). The Company and RCSC had been in discussions of how best to resolve the guaranteed payments due under their agreement when on February 24, 2008, the Company received a complaint from Dolphin and RCSC seeking $685,667 and other damages from a breach of the Performance Guarantee, Most Favored Nations and Non-Competition clauses of the agreements between the parties.                          The Company filed its answer to the complaint on March 24, 2008, refuting many of the claims. The Company plans to vigorously defend the claims, and will argue that the payments guaranteed under the Performance Guarantee will be paid to Dolphin on a delayed basis due to an unforeseen bankruptcy of one of its customers, and unforeseen market conditions. The Company has recently proposed a settlement agreement to Dolphin whereby their investment and anticipated return is paid in fully by        May of 2010. This is accomplished by selling 12 of the RCSC simulators prior to that date.

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On June 2, 2008, the Company received a complaint from Universal Studios, LLC as a result of defaulting on a $25,000 payment due on March 1, 2008. The Plaintiff is seeking $194,000, which is the $150,000 due plus penalties. They have called seeking a settlement agreement, but no settlement offer has been drafted at this time.

As of the filing of this Quarterly Report on Form 10-Q, the Company is not aware of any other material legal actions directed against the Company.

**Item 1A. Risk Factors**

**Note on Forward-Looking Information**

This Form 10-Q and other statements issued or made from time to time by the Company or its representatives contain statements, which may constitute “forward-looking statements” within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934, as amended by the Private Securities Litigation Reform Act of 1995, 15 U.S.C.A        Sections 77z-2 and 78u-5. Those statements include statements regarding the intent, belief, or current expectations of the Company and members of its management team as well as the assumptions on which such statements are based. All statements, trend analyses, and other information contained in this report relative to markets for the Company’s products and/or trends in the Company’s operations or financial results, as well as other statements which include words such as        “anticipate(s),” “could,” “feel(s),” “believes,” “plan,” “estimate(s),” “expect(s),” “should,” “intend(s),” “will,” and other similar expressions, constitute forward-looking statements and are subject to known and unknown risks, uncertainties and other factors that may cause actual results to be materially different from those contemplated by the forward-looking        statements. Such factors include, among other things: (i) general economic conditions that may impact the disposable income and spending habits of consumers; (ii) the availability of alternative entertainment for consumers; (iii) the ability of the Company to obtain additional capital; (iv) the receipt of a going concern opinion from the Company’s independent public accountants; and (v) the ability of the Company to control costs and execute its business plan.

The reader is cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and that actual results may differ materially from those contemplated by such forward-looking statements. Important factors currently known to management that could cause actual results to differ materially from those        in forward-looking statements are set forth herein. The Company undertakes no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time.         

The Company has a history of losses, and the report of our independent accountants issued in connection with the audit of our financial statements contained a qualification raising a doubt about our ability to continue as a going concern. The Company currently is relying on prospective debt financing arrangements, and on simulator sales revenue using its        existing simulator inventory to offset its operating costs and debt obligations over the next 12 months, or until enough revenue share simulators are in the market to provide sufficient to cover these costs. As such, there is risk that the financing will not be available, or available on terms acceptable to the Company, and there is risk that the timing of the simulator sales will not coincide with the need for cash to cover operating expenses and note payments. If no meaningful        financing is secured by the Company in the near term, it may jeopardize the Company’s ability to maintain agreements with creditors to hold off taking actions against the Company for payments due. See further discussion under “Liquidity and Capital Resources” and “Risk Factors” below.

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**Item 2.     Unregistered Sales of Equity Securities and Use of Proceeds**

None, not applicable.

**Item 3. Defaults upon Senior Securities**

None, not applicable.

**Item 4. Submission of Matters to a Vote of Security Holders**

None, not applicable.

**Item 5.     Other Information**

None, not applicable.

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**Item 6.      Exhibits**

|  | A.      | Exhibits. |
|--|----------------------------------|-----------|

3(i)     Articles of Incorporation13(ii)     By-Laws1

10.1     Form of Secured Bridge Notes210.2     Form of Procurement Contract310.3     Form of Master Revenue Sharing Agreement3

10.4     Asset Purchase Agreement with Race Car Simulation Corporation, a portfolio company of Dolphin Direct Equity Partners, LP4

10.5     Asset Purchase Agreement with Checker Flag Lightning, LLC (“CFL”), a Michigan limited liability corporation5          

10.6     Form of 2007 Secured Promissory Note6

10.7     Form of 2007 Common Stock Purchase Warrant 6

10.8     Form of 2008 Secured Promissory Note 6

10.9     Form of 2008 Common Stock Purchase Warrant 6

11.1     Computation of Earnings (Loss) Per Share

21.1     Subsidiaries

31.1     Certification of William R. Donaldson as Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14 of the Security Exchange Act of 1934.

32.1     Certification of William R. Donaldson as Chief Executive Officer pursuant to 18 U.S.C. Section 1350.

32.2     Certification of William R. Donaldson as Chief Financial Officer and Treasurer pursuant to 18 U.S.C. Section 1350.

     1) Incorporated by reference from Form 10-QSB filed on November 16, 2002             2) Incorporated by reference from Form 8-K filed on March 13, 2003

3) Incorporated by reference from Form 10-QSB filed on May 17, 2004

     4) Incorporated by reference from Form 8-K filed on January 6, 2005             5) Incorporated by reference from Form 8-K filed on January 6, 2007             6) Incorporated by reference from Form 10-QSB filed on November 16, 2007

B.      Reports on Form 8-K.         

None

 

 

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**SIGNATURES**

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

**INTERACTIVE MOTORSPORTS AND ENTERTAINMENT CORP.**

**     **

|                |   |                                                                    |
|---------------------|--------|-------------------------------------------------------------------------|
| Date: June 18, 2008 |   | /s/ William R. Donaldson                                                |
|                |   |                                                                    |
|                |   | William R. Donaldson

Chairman of the Board and Chief Executive Officer |

Pursuant to the requirements of the Securities Exchange of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

|                |   |                                                                                                                     |
|---------------------|--------|--------------------------------------------------------------------------------------------------------------------------|
| Date: June 18, 2008 |   | /s/ William R. Donaldson                                                                                                 |
|                |   |                                                                                                                          |
|                |   | William R. Donaldson

Chairman of the Board and Chief Executive Officer                    (Principal Executive Officer) |

|                |   |                                                                                                   |
|---------------------|--------|--------------------------------------------------------------------------------------------------------|
| Date: June 18, 2008 |   | /s/ William R. Donaldson                                                                               |
|                |   |                                                                                                   |
|                |   | William R. Donaldson

Chairman of the Board and Chief Executive Officer

(Principal Financial Officer) |

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****

**EXHIBIT INDEX**

Exhibits:

10.6     Form of 2007 Secured Promissory Note

10.7     Form of 2007 Common Stock Purchase Warrant

10.8     Form of 2008 Secured Promissory Note

10.9     Form of 2008 Common Stock Purchase Warrant

11.1     Computation of Earnings (Loss) Per Share

21.1     Subsidiaries

31.1     Certification of William R. Donaldson as Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14 of the Security Exchange Act of 1934.

32.1     Certification of William R. Donaldson as Chief Executive Officer pursuant to 18 U.S.C. Section 1350.

32.2     Certification of William R. Donaldson as Chief Financial Officer and Treasurer pursuant to 18 U.S.C. Section 1350.

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